Dhirendra Kumar sheds light on rebalancing and its importance for your portfolio
Click here to watch the video
How important is rebalancing one's portfolio?
It's very important, as most people are very passive about their investments in the sense that they do their SIPs and forget about it, without thinking about their asset allocation. As you get closer to your goal or as you get older, the level of your risk tolerance comes down. For example, a 15 per cent decline may be unnerving for you.
Rebalancing is all about deciding on asset allocation. For example, an old person retires with sizable money and he decides to invest half of it in equity and half of it in fixed income. Suddenly, the equity markets fall and his 50 per cent allocation reduces to 45 per cent. So, now to rebalance it, he will move money from fixed income to equity in order to restore the original 50:50 allocation.
The moment you do it, you are buying cheap. Typically, if you do it annually, it can be done with great efficiency and this method, in my opinion, can enhance your return quite meaningfully in any time period.
Most of the time, people run away when the market falls and they start investing with great confidence when it is at its peak. Now, here, they are doing the reverse effect, as they end up investing when the market has ripped down and actually, moving money out from equity when it has gone up. Nobody can predict when the markets will fall but one has to understand that fixed income goes up steadily and equity, on the other hand, generates more returns but in a very erratic manner . So, to earn profit from this, rebalancing is the key.